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  • Writer's pictureSANJANA JEVRANI

WHAT IS MONEY LAUNDERING?

Updated: Mar 29


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Money laundering is making illegally obtained funds, often referred to as "dirty money," appear legitimate by integrating them into the financial system.

Money laundering is a conversion process of making illegal money look legal. It's a big problem for the world's money systems.


People who do it use tricky methods like fake companies and complicated deals to hide where the money came from. As technology improves, they find new ways to do it, so rules and watchfulness need to keep up. Understanding how money laundering works helps us stop it and keep economies safe.


 

What Methods Are Used to Launder Money?


  1. Placement: This involves placing the illicit funds into the legitimate financial system. It can involve depositing cash into bank accounts, purchasing assets like real estate, or using currency exchanges to convert cash into monetary instruments like traveler's checks.

  2. Layering: In this stage, the launderer engages in complex financial transactions to obscure the origin of the funds. This may involve multiple transfers between different accounts and financial institutions, often across international borders, to create a complex trail that is difficult to trace.

  3. Integration: Here, the laundered funds are reintroduced into the economy as seemingly legitimate wealth. This could involve investing in businesses, purchasing luxury assets like cars or artwork, or simply mixing illicit funds with legitimate income through everyday transactions.

  4. Shell companies: Launderers may set up shell companies, which are often paper entities with little to no legitimate business activity, to obscure the true ownership of assets and facilitate the movement of illicit funds.

  5. Trade-based laundering: In this method, criminals manipulate trade transactions to move value across borders without attracting attention. This could involve over- or under-invoicing goods or services, misrepresenting the quantity or quality of goods, or using multiple layers of intermediaries to obscure the true nature of the transactions.


 

What Is an Example of Money Laundering?


  1. Trade-Based Money Laundering: Criminals inflate goods' value in import/export, laundering money through legal trade. For example, invoicing $1 million but transferring $2 million includes $1 million in illicit funds.

  2. Structuring or Smurfing: Criminals split large sums into smaller deposits under-reporting limits, avoiding suspicion. For instance, depositing $9,000 in different bank branches on a single day.

  3. Real Estate Investment: Criminals buy real estate with illicit money, hiding the source via shell companies or straw buyers. Selling the properties later cleans the money.

  4. Cash-Intensive Businesses: Criminals blend dirty money with clean money in cash-based businesses like restaurants or casinos, making fund origins harder to trace.

  5. Cryptocurrency Transactions: Bitcoin and other cryptocurrencies are used in money laundering, with criminals using mixing services to hide fund origins, making tracking challenging for law enforcement.

 

How does Money Laundering work?




  1. Placement: Illegal funds are introduced into the financial system, often through activities like cash deposits or purchases of valuable assets.

  2. Layering: The funds are moved around and transformed through a series of complex transactions to obscure their origin and create confusion about their ownership.

  3. Integration: The laundered funds are reintroduced into the economy in a way that makes them appear legitimate, such as through investments or purchases of goods and services.

 
Types of Transactions

Money laundering can take various forms, including the following methods:


  1. Structuring or Layering: This involves dividing large sums of illegally obtained cash into smaller deposits and distributing them across numerous accounts.

  2. Mules or Cash Smuggling: Money is smuggled across borders and then deposited into foreign bank accounts.

  3. Commodities Investment: Criminals may invest in easily transportable assets like gems and gold, which can be moved to different jurisdictions.

  4. Buying and Selling: Illicit cash is used for rapid investments in assets such as real estate, vehicles, and boats, with the aim of quick turnover.

  5. Gambling: Launderers may use casino transactions to legitimize and integrate their illicit funds.

  6. Shell Companies: Setting up dormant companies or corporations that exist only on paper, providing a veil for illegal activities.

 
Detecting Digital Money Laundering

  1. Transaction Monitoring: Implement automated systems to monitor financial transactions in real time, flagging any unusual patterns or behaviors that deviate from typical customer activity.

  2. Anomaly Detection: Utilize advanced analytics to identify anomalies such as rapid and large transfers between multiple accounts, frequent transfers to high-risk jurisdictions, or irregular transaction patterns inconsistent with normal behavior.

  3. Customer Due Diligence: Conduct thorough customer due diligence, verifying the identity of account holders and assessing the legitimacy of their transactions. Look for discrepancies in customer information or suspicious behavior.

  4. Blockchain Analysis: Employ specialized tools for analyzing blockchain transactions to trace the flow of funds through cryptocurrency networks. This can help identify suspicious patterns or addresses associated with illicit activity.

  5. Machine Learning Algorithms: Implement machine learning algorithms to continuously improve detection capabilities by learning from historical data and adapting to new money laundering techniques.

 

How Are Cryptocurrencies Used in Money Laundering?


Here's how cryptocurrencies are utilized in money laundering:


  1. Pseudonymity: Cryptocurrency transactions on the blockchain are public but not linked to real identities. Users can have multiple wallets anonymously, enabling pseudonymous transactions.

  2. Mixing Services: Money launderers use mixing services (tumblers) to blend transactions and obscure fund origins, mixing illicit coins with legal ones, and complicating fund tracing.

  3. Privacy Coins: Privacy coins like Monero, Zcash, and Dash use advanced features like ring signatures and coin mixing to increase transaction anonymity, enhancing privacy in cryptocurrency transactions.

  4. Peer-to-Peer Exchanges: Criminals use P2P crypto exchanges to trade directly with users, avoiding strict KYC and AML regulations enforced by traditional exchanges.

  5. Cross-Border Transactions: Cryptocurrencies enable fast, cross-border transactions, aiding money launderers in moving funds globally. Converting illicit money to crypto and back obscures the trail.

 
CONCLUSION

Money laundering remains a global threat needing cooperation among governments, financial institutions, and law enforcement. Evolving tactics challenge regulations; solutions require anti-money laundering measures, transparency, awareness, and digital regulation adjustments.



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